Tokyo, April 1 (Bloomberg) -- Japanese business confidence was unchanged in the first quarter, dashing expectations of an improvement and signaling the world's second-biggest economy may not emerge from 17 months of recession as soon as anticipated. Pessimists outnumbered optimists 10 to 1, leaving the index of confidence among large manufacturers at minus 38 last quarter, the Bank of Japan's Tankan survey showed. Economists had forecast a rise to minus 35. Confidence among retailers and other non-manufacturers, which do most of their business at home, was unchanged at minus 22. Large manufacturers such as Fujitsu Ltd. expect conditions to improve this quarter as the U.S. recovery gathers pace, while the likes of retailer Daiei Inc. expect little improvement as domestic demand sags. The divergent outlook shows the limitations of Japan's reliance on exports to snap the recession. ``If things don't go as expected with exports, then the whole scenario of a recovery collapses,'' said Shuji Shirota, an economist at Dresdner Kleinwort Wasserstein. ``Personal spending isn't going to a lead a recovery, and capital spending got worse.'' The yen had its biggest decline in a week, falling to 133.18 to the dollar from 132.73 in New York on Friday. ``The Tankan betrayed expectations for some sign of improvement in the economy,'' said Takashi Nakata, spot foreign exchange proprietary trading manager at BNP Paribas SA. The Topix stock index fell 0.1 percent in morning trade, led by NTT Corp. and Japan Telecom Ltd. and Mizuho Holdings Inc., the world's biggest bank by assets. Exporters Toyota Motor Corp. and Sony Corp. rose.

Cleaning House
Some large manufacturers, such as Fujitsu, are confident the worst is over after cleaning house the past year. The world's third- biggest maker of memory chips for cell phones, which expects to have a record $2.85 billion loss in the fiscal year that ended yesterday, says it will return to profit this year as it reaps the savings from shedding about 22,000 workers, or a tenth of its workforce. Others, such as Sharp, are counting on an increase in sales to the U.S., which slumped last year as Japan's biggest export market slid into recession after a record 10-year expansion. Sharp's new liquid-crystal display panel factory is running at full capacity a month ahead of schedule to meet rising demand for personal computers at home and overseas. The Tankan survey of 8,651 companies is considered Japan's best gauge of business confidence. An unchanged reading has signaled a turning point in confidence before. The index held steady in the fourth quarter of 2000 after seven consecutive increases, then went into a yearlong swoon as the economy slid into recession. The large manufactures' confidence index is forecast to rise 11 points to minus 27 this quarter, the Tankan said.

Grim Outlook
For companies doing business at home, the outlook is grimmer. The large non-manufacturers index is forecast to rise just one point to minus 21 this quarter, the Tankan showed. Two and a half years of deflation have savaged earnings, and near-record unemployment is curbing consumer spending, which makes up 55 percent of the economy. Daiei, Japan's second-biggest retailer, needed a 520 billion yen ($3.9 billion) debt waiver from its banks to stay in business. Prime Minister Junichiro Koizumi, encumbered by the industrial world's biggest debt, will cut spending on roads, dams and other public works by 10 percent this fiscal year, a fatal blow for some construction companies. Nissan Construction Co. yesterday filed for bankruptcy protection, the second listed contractor to go under this year. Toray Industries Inc., Japan's biggest maker of synthetic fibers, plans to cut about 2,000 jobs, or 9 percent of its workforce within two years to cut costs as it seeks to revive earnings, the Asahi and Yomiuri newspapers reported today, without citing sources.

Profits, Spending
Large manufacturers expect profits to rise 37 percent in the fiscal year starting today, the Tankan said, after falling an estimated 45 percent in the fiscal year ended yesterday, the biggest drop in more than a quarter century. An improvement in earnings may not translate into an increase in business spending, which slumped in the fourth quarter last year when the economy shrank 1.2 percent. Capital spending will drop 8.4 this fiscal year, the Tankan showed, extending an estimated 6.7 percent decline last fiscal year. Manufacturing is just starting to recover from a yearlong slide that left companies with plenty of idle machinery to tap before they need to expand. Some, such as camera-maker Minolta Co. are shifting production to China and other low-cost countries. Minolta last week said it will post a 31 billion yen loss in the fiscal year just ended, almost half as big again as its initial forecast, and cut 500 jobs.

Disappearing Jobs
Most of the jobs that disappeared from Japan may never return, as companies trim bloated workforces and move to China, where labor costs are 10 times to 30 times cheaper than at home. The jobless rate held at 5.3 percent in February, just below December's record 5.5 percent. ``It will take quite a while for business spending to follow suit,'' said Aozora Bank economist Yasukazu Shimizu. ``Companies will wait a while before they go ahead with their next steps. In a way, the initial recovery process will be without jobs and capital spending.''